Geopolitics

Digital VAT? A Tax Windfall If Latin America Finds Consensus

Countries like Argentina, Chile and Mexico have begun charging a value added tax (VAT) on digital purchases. But that may just be the tip of iceberg, especially if governments can reach a regional consensus.

A delivery worker in Buenos Aires, Argentina
A delivery worker in Buenos Aires, Argentina
Héctor Cancino Salas

SANTIAGO — "Hello, and thank you for using our services," says the website, before adding: "We'd like to inform you that from next month, due to fiscal changes in the country, your membership fee will rise with the increase in digital VAT."

In recent months, millions of users of digital services in Latin America have received messages along these lines, and for a simple reason: The digital boom that's been fueled by companies like Rappi, Netflix or Uber, to name just a few, has caught the taxman's attention. And in most cases, it's the consumer who pays.

Paola Soriano, head of consumer research for Latin America at the market intelligence consultancy IDC, says that these kinds of disruptive services — the transportation, food delivery, audiovisual entertainment or lodging sectors — are part of a new economic reality.

They've gained market share, she says, especially during the pandemic, and as such, Latin American is catching up with what was already a global trend. It's only logical, therefore, that tax systems would also adapt to include this new, and growing volume of business, Soriano adds.

Still, following the money is easier said than done. Challenges include the ability of such firms to engage in multiple activities and earn money simultaneously in several countries, without any significant physical presence there. Without tax residency in those countries — the traditional criterion for fiscal obligations — taxing their activities in consumer countries becomes difficult.

As the UN agency ECLAC points out in its 2020 Fiscal Outlook for Latin America and the Caribbean, multinational firms can pick and choose their residencies and operational centers in line with the fiscal pressures they face in any region. They then transfer their taxable utilities toward jurisdictions with little or no taxation.

This has currently made VAT (Value Added Tax) on digital services the most reliable means for governments wanting to taxing offshore firms operating in their country. And so far, it is proving a good first step for regional treasuries.

Leveling the playing field

Leonardo Hernández, a professor in public administration at Chile's Catholic University, sees it as an entirely reasonable solution in terms of economic efficiency. "They've simply leveled the playing field for other goods and services," he says. "There's no reason for exempting digital services."

In Chile, as part of recent fiscal reforms, the government began charging VAT on online services from July 1, 2020. Felipe Larraín, who twice served as the country's finance minister, most recently from 2018-2019, says that officials realized the absence of the VAT meant two things: less revenues for the state and unfair competition for the traditional economy.

Latin American is catching up with what was already a global trend.

As an example, he points to the way platforms like Airbnb compete with hotels without paying either VAT or income tax. "We couldn't see any reason why the digital economy, with all its advantages, should not pay taxes," Larraín explains. "That was the basis of the problem."

Gustavo López-Ameri, a tax partner at auditors Deloitte Perú, says that his country is keeping an eye on Chile's fiscalization of the digital sphere, and that the Peruvian government is mulling extending the sales tax (IGV) — already applicable to business-to-business operations — to the business-to-consumer (B2C) sector.

"If we consider it from the point of view of the consumer-natural person, it wouldn't be desirable," he says. "But from the point of view of taxation, the move is necessary and fair. In fact, Peruvian entrepreneurs who venture into a digital business selling to the world must pay the IGV, while foreign multinationals provide digital services to local users without paying the tax. These types of measures level the playing field."

Further north, in Mexico, a 16% VAT rate on digital products and services entered into force on June 1. That ends the unfair advantage foreign firms enjoyed, says Antonio Zuazua, a tax partner with auditors KPMG México. "Very clearly and obviously tax payment was due here," he says.

Checking Airbnb rentals in Sao Paulo, Brazil — Photo: Daniel Cymbalista/Fotoarena via ZUMA

Víctor Aguírre López, a co-founder of the law firm BlackBox Startup Law, which advises startups, explains that the norm will soon affect many firms that aren't physically present in Mexico, and thus haven't had to pay taxes despite selling high-consumption digital services there.

Consumer costs

KPMG reports that as of February 2020, 77 countries indirectly tax digital transactions and eight more are considering doing so. In Latin America, Argentina, Colombia and Uruguay were the first to apply the digital tax in 2018, respectively at rates of 21%, 22% and 19%.

Argentina later introduced more indirect taxes to digital transactions, and in doing so added $22 million to the treasury in the first three months of 2019. Uruguay earned $18.4 million in the first five months of that year, while Colombia's tax and customs authority, DIAN, reported that in January 2019 it earned some $12 million from digital VAT for transactions in the second half of 2018.

Ecuador and Paraguay joined the trend in 2019. Mexico and Chile followed suit by applying the VAT, starting earlier this year, and Bolivia, Peru and the Dominican Republic are likely to do the same in the near future.

As expected, most firms subject to this tax adjusted prices to pass the tax onto their consumers. "That means a service that would cost 100 pesos is now selling at 116; with 16 pesos in VAT," says KPMG México's Antonio Zuazua.

Startup advisor Víctor Aguírre López has a slightly different take. He says that when service providers raise their rates, they risk losing customers. "Consumers are sensitive to prices and may choose to look for substitutes," he says. But IDC's Paola Soriano says that even with the price hikes, the services these digital companies provide are still cheaper than the traditional alternatives, such as cable subscriptions or buying actual CDs or DVDs.

Most firms subject to this tax adjusted prices to pass the tax onto their consumers.

Soriano says that everything will ultimately depend on governments, which have difficult decisions to make, especially given the current economic context. Unemployment is on the rise throughout the region, and many of those who do work have only informal employment. She believes prices may rise, to be provisionally offset with temporary discounts, package prices or added services.

Room for growth

ECLAC, for its part, is advising regional states not to forego this key source of revenues as digital sales expand, in spite of the legislative complications involved. And it doesn't have to end with the VAT. A next step — and one that a number of governments are currently contemplating — could be to target revenues from sales in a given country.

Former minister Felipe Larraín, now a lecturer at Chile's Catholic University, says the challenge is finding the way to tax the proportion of a multinational's revenues that is generated in your country. He expects the Organization for Economic Cooperation and Development to make proposals on this.

López-Ameri of Deloitte Perú agrees. He says that what's needed is a standardized, regional taxation norm, and he expects that a consensus may soon emerge in the framework of OECD deliberations. Whether that means following the approach taken in France, which has been aggressive in how it taxes digital services, remains to be seen. But BlackBox's Aguirre, for one, does think decisions taken in Europe may come to have a big influence on Latin America.

For now, taxes on digital services generate only a modest amount for revenue for governments in Latin America. But as Larraín point outs, the sector is growing — at a faster rate than traditional retailing — and will continue to do so for the foreseeable future. "That's hey you have the solution in place before it becomes a very significant quantity of resources that is not being taxed," he says.

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food / travel

The True Horrors Behind 7 Haunted Locations Around The World

With Halloween arriving, we have dug up the would-be ghosts of documented evil and bloodshed from the past.

Inside Poveglia Island's abandoned asylum

Laure Gautherin and Carl-Johan Karlsson

When Hallows Eve was first introduced as a Celtic festival some 2,000 years ago, bonfires and costumes were seen as a legitimate way to ward off ghosts and evil spirits. Today of course, with science and logic being real ghostbusters, spine-chilling tales of haunted forests, abandoned asylums and deserted graveyards have rather become a way to add some mystery and suspense to our lives.

And yet there are still spooky places around the world that have something more than legend attached to them. From Spain to Uzbekistan and Australia, these locations prove that haunting lore is sometimes rooted in very real, and often terrible events.

Shahr-e Gholghola, City of Screams - Afghanistan

photo of  ruins of Shahr-e Gholghola,

The ruins of Shahr-e Gholghola, the City of Screams, in Afghanistan

Dai He/Xinhua via ZUMA Wire


According to locals, ghosts from this ancient royal citadel located in the Valley of Bamyan, 150 miles northwest of Kabul, have been screaming for 800 years. You can hear them from miles away, at twilight, when they relive their massacre.

In the spring 1221, the fortress built by Buddhist Ghorids in the 6th century became the theater of the final battle between Jalal ad-Din Mingburnu, last ruler of the Khwarezmian Empire, and the Mongol Horde led by Genghis Khan. It is said that Khan's beloved grandson, Mutakhan, had been killed on his mission to sack Bamyan. To avenge him, the Mongol leader went himself and ordered to kill every living creature in the city, children included.

The ruins today bear the name of Shahr-e Gholghola, meaning City of Screams or City of Sorrows. The archeological site, rich in Afghan history, is open to the public and though its remaining walls stay quiet during the day, locals say that the night brings the echoes of fear and agony. Others claim the place comes back to life eight centuries ago, and one can hear the bustle of the city and people calling each other.

Gettysburg, Civil War battlefield - U.S.

photo of rocks and trees in Gettysburg

View of the battlefields from Little Round Top, Gettysburg, PA, USA

Unsplash/@nemo23


Even ghosts non-believers agree there is something eerie about Gettysbury. The city in the state of Pennsylvania is now one of the most popular destinations in the U.S. for spirits and paranormal activities sight-seeing; and many visitors report they witness exactly what they came for: sounds of drums and gunshots, spooky encounters and camera malfunctions in one specific spot… just to name a few!

The Battle of Gettysburg, for which President Abraham Lincoln wrote his best known public address, is considered a turning point in the Civil War that led to the Union's victory. It lasted three days, from July 1st to July 3rd, 1863, but it accounts for the worst casualties of the entire conflict, with 23,000 on the Union side (3,100 men killed) and 28,000 for the Confederates (including 3,900 deaths). Thousands of soldiers were buried on the battlefield in mass graves - without proper rites, legend says - before being relocated to the National Military Park Cemetery for the Unionists.

Since then, legend has it, their restless souls wander, unaware the war has ended. You can find them everywhere, on the battlefield or in the town's preserved Inns and hotels turned into field hospitals back then.

Belchite, Civil War massacre - Spain

photo of sunset of old Belchite

Old Belchite, Spain

Belchite Town Council


Shy lost souls wandering and briefly appearing in front of visitors, unexplainable forces attracting some to specific places of the town, recorded noises of planes, gunshots and bombs, like forever echoes of a drama which left an open wound in Spanish history…

That wound, still unhealed, is the Spanish Civil War; and at its height in 1937, Belchite village, located in the Zaragoza Province in the northeast of Spain, represented a strategic objective of the Republican forces to take over the nearby capital city of Zaragoza.

Instead of being a simple step in their operation, it became the field of an intense battle opposing the loyalist army and that of General Francisco Franco's. Between August 24 and September 6, more than 5,000 people were killed, including half of Belchite's population. The town was left in rubble. As a way to illustrate the Republicans' violence, Franco decided to leave the old town in ruins and build a new Belchite nearby. All the survivors were relocated there, but they had to wait 15 years for it to be complete.

If nothing particular happens in new Belchite, home to around 1,500 residents, the remains of old Belchite offer their share of chilling ghost stories. Some visitors say they felt a presence, someone watching them, sudden change of temperatures and strange sounds. The ruins of the old village have been used as a film set for Terry Gilliam's The Adventures of Baron Munchausen - with the crew reporting the apparition of two women dressed in period costumes - and Guillermo del Toro's Pan's Labyrinth. And in October 1986, members of the television program "Cuarta Dimensión" (the 4th dimension) spent a night in Belchite and came back with some spooky recordings of war sounds.

Gur Emir, a conquerer’s mausoleum - Uzbekistan

photo of Gur Emir (Tomb of Timur) i

Gur Emir (Tomb of Timur) in Samarkand, Uzbekistan

Chris Bradley/Design Pics via ZUMA Wire


The news echoed through the streets and bazaars of Samarkand: "The Russian expedition will open the tomb of Tamerlane the Great. It will be our curse!" It was June 1941, and a small team of Soviet researchers began excavations in the Gur-Emir mausoleum in southeastern Uzbekistan.

The aim was to prove that the remains in the tomb did in fact belong to Tamerlane — the infamous 14th-century conqueror and first ruler of the Timurid dynasty who some historians say massacred 1% of the world's population in 1360.

Still, on June 20, despite protests from local residents and Muslim clergy, Tamerlame's tomb was cracked open — marked with the inscription: "When I Rise From the Dead, The World Shall Tremble."

Only two days later, Nazi Germany invaded the Soviet Union, with the people of Samarkand linking it to the disturbing of Tamerlane's peace. Amid local protests, the excavation was immediately wrapped up and the remains of the Turkish/Mongol conqueror were sent to Moscow. The turning point in the war came with the victory in the Battle of Stalingrad — only a month after a superstitious Stalin ordered the return of Tamerlane's remains to Samarkand where the former emperor was re-buried with full honors.

Gamla Stan, a royal massacre - Sweden

a photo of The red house of Gamla Stan, Stockholm, Sweden

The red house of Gamla Stan, Stockholm, Sweden

Unsplash/@hkblind


After Danish King Kristian II successfully invaded Sweden and was anointed King in November 1520, the new ruler called Swedish leaders to join for festivities at the royal palace in Stockholm. At dusk, after three days of wine, beer and spectacles, Danish soldiers carrying lanterns and torches entered the great hall and imprisoned the gathered nobles who were considered potential opponents of the Danish king. In the days that followed, 92 people were swiftly sentenced to death, and either hanged or beheaded on Stortorget, the main square in Gamla Stan (Old Town).

Until this day, the Stockholm Bloodbath is considered one of the most brutal events in Scandinavian history, and some people have reported visions of blood flowing across the cobblestoned square in early November. A little over a century later, a red house on the square was rebuilt as a monument for the executed — fitted with 92 white stones for each slain man. Legend has it that should one of the stones be removed, the ghost of the represented will rise from the dead and haunt the streets of Stockholm for all eternity.

Port Arthur, gruesome prison - Australia

a photo of ort Arthur Prison Settlement, Tasmania, Australia

Port Arthur Prison Settlement, Tasmania, Australia

Flickr/Eli Duke


During its 47-year history as a penal settlement, Port Arthur in southern Tasmania earned a reputation as one of the most notorious prisons in the British Empire. The institution — known for a brutal slavery system and punishment of the most hardened criminals sent from the motherland— claimed the lives of more than 1,000 inmates until its closure in 1877.

Since then, documented stories have spanned the paranormal gamut: poltergeist prisoners terrorizing visitors, weeping children roaming the port and tourists running into a weeping 'lady in blue' (apparently the spirit of a woman who died in childbirth). The museum even has an 'incidence form' ready for anyone wanting to report an otherworldly event.

Poveglia Island, plague victims - Italy

a photo of Poveglia Island, Italy

Poveglia Island, Italy

Mirco Toniolo/ROPI via ZUMA Press


Located off the coast of Venice and Lido, Poveglia sadly reunites all the classical elements of a horror movie: plagues, mass burial ground and mental institute (from the 1920's).

During the bubonic plague and other subsequent pandemics, the island served as a quarantine station for the sick and anyone showing any signs of what could be Black Death contamination. Some 160,000 victims are thought to have died there and the seven acres of land became a mass burial ground so full that it is said that human ash makes up more than 50% of Poveglia's soil.

In 1922 a retirement home for the elderly — used as a clandestine mental institution— opened on the island and with it a fair amount of rumors involving torture of patients. The hospital and consequently the whole island was closed in 1968, leaving all the dead trapped off-land.

Poveglia's terrifying past earned it the nickname of 'Island of Ghosts'. Despite being strictly off-limits to visitors, the site has been attracting paranormal activity hunters looking for the apparition of lost and angry souls. The island would be so evil that some locals say that when an evil person dies, he wakes up in Poveglia, another kind of hell.

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